In this post, I provide a valuation of Eicher Motor's equity. As I had written in my post on the two-wheeler market share trends in India, Eicher Motors' Royal Enfield brand gained a 1.5 percentage point market share between 2014 and 2016. The more relevant metric is, however, the 80% market share it has among motorcycles priced between one and two lakh rupees, a niche that is expected to sell one million units in CY17. The company's spares and service sales too has been increasing at a rapid pace.
Historical and Forecasts
Let us consider the trends in the total revenue, total expenses and the net profit margin. The first two are in crores of rupees, whereas the third is in percentage. 2016 onward, the numbers are forecasts.
Let us analyze the growth trends in some important income statement and balance sheet items on a CAGR basis between 2011 and 2015. Revenue from operations net of excise duty increased by around 20%, and since it is the most important component of total revenue, the latter also increased by as much. Cost of materials consumed was the largest contributor at around 60% to the total expenses, and hence the growth of the former by around 16% limited the growth of the latter to around 19% despite the much higher rate of growth of its other constituents. The difference in the growth rates between the revenue and the expenses, combined with the low level of profit when compared to either of these, led the profit before tax to grow by around 24%. Although the tax expense increased by around 30%, the minority interest decreased by 10%, leading the profit after tax to grow by 32%.
Coming to the liabilities side of the balance sheet, the increase in the reserves and surplus by around 16% increased the total shareholder's equity by around that much. The minority interest increased by 7.4%. Deferred tax assets and long-term provisions increased by 32% and 24% respectively, leading to an increase in the non-current assets by around 27%. Coming to current liabilities, which increased by 21.5%, trade payable and other current liabilities were its largest constituents, and increased by 24% and 18% respectively.
On the asset side, fixed assets grew by around 22%, aided by the growth of tangible assets at around 27% and intangible assets at around 89%, but hindered by the reduction in capital work in progress at around 10%. High rates of growth of non-current investments and other non-current assets led the non-current assets to increase by approximately 27%. A nearly 17% reduction in cash and cash equivalents which constituted around 44% of current assets in 2011, kept the growth in current assets at a moderate 8.8%.
Forecasts for the income statement and balance sheet items were based on a linear or growth trend as deemed fit for the individual items, keeping in mind their past growth rate.
The Valuation
The FCFE increased to ₹2,177 crore in 2025 from ₹ 899 crore in 2015. To find the value due to the FCFEs in the forecast period from 2017 to 2026, these are discounted based on the cost of equity calculated based on the CAPM model. A risk free rate of 6.5% based on the yield of the 10 year Government of India bond is taken. For the country risk premium, two values for India have been calculated by professor Aswath Damodaran of the New York University Stern School of Business. One of these (7.39%) is based on the Sovereign CDS and the other (8.82%) is based on the local currency sovereign rating provided by a rating agency. I find the former more palatable since the ratings agencies have taken flak for giving excellent ratings to the securitization products that brought the U.S. economy down in 2008. The beta of the stock has been taken from an online source and is 0.71. Together, these yield a cost of equity of 11.75%. The terminal growth rate for the FCFEs is assumed to be 5% since the economy is expected to change its growth rate from around 6% in 2016 to around 3% by 2060, but until 2035, grows at over 5%. The automobile sector's contribution to the economy is thus assumed not to change much since it keeps pace with the economic growth.
The Price
The value finally arrived at is ₹7790, which is around 68% lower than the current price of around ₹24,750. Hence, the scrip seems highly over-priced. A sensitivity analysis based on slightly different values of the terminal growth rate (TG) and the equity risk premium (RP) can be found below.
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